The Fed's effort to control the rise of its key interest rate is running into some problems

Smaller banks "have been much more aggressive" in expanding lending than large banks, causing them to have to borrow from bigger institutions. That is creating most of the demand in the short-term funds market as big banks already have nearly $2 trillion in reserves at the Fed. That in turn is driving the funds rate higher, said Steve Blitz, chief U.S. economist at TS Lombard. Blitz said there remains some confusion about how high the level of reserves needs to be at the Fed, creating uncertainty about how far the Fed should go in tightening. As for the effort to keep the funds rate in check, "it doesn't seem to be working," he added.